A few weeks ago, I was contacted by an Indian financial service provider. They asked me to speak at their Specialty Chemicals Investor day. I explained that my focus is on China – but it turned out that this was exactly what they were interested in.

The thinking among Indian investors is that increasing environmental regulation in China will increase production costs and thus make Indian players more competitive. Anecdotally, in specific sub segments such as a certain type of dyes, the profit margins of Indian producers have doubled in the past 12 months or so, which is mostly attributed to the closing down or cost increases of Chinese competitors. Here are some quotes from different Indian analyst reports:

“Our analysis of leading Chinese [chemical] manufacturers indicates increasing cost pressure in China. Factors such as appreciating currency, increasing cost of labor & power and tightening pollution control norms have diluted the cost advantages enjoyed by Chinese manufacturers earlier.”

“The Chinese Ministry of Environmental Protection has enforced strict penalties with effect from January 2015. This has resulted in many plant shutdowns and softening of China’s chemical exports. According to industry experts, the cost of production of India’s specialty chemicals works out to 10-15% lower than that in China after investment in environmental protection.”

“Implementation of new environmental laws in China has already caused a decline in its chemicals exports and the trend is likely to accentuate in 2016‐17.”

In my presentation to about 70 analysts in Mumbai, I explained that the reality is probably a bit more complex than this. Indeed, certain chemical segments in China may suffer in the future, especially those which are particularly dirty, low-tech and labor intensive. Often these are chemicals segments for which the customer industries are also moving away from China due to the increased salaries. For example, even Chinese textile companies now have started closing down some factories in China and moving production to places such as Vietnam. Other restrictions are for substances which are no longer used in most highly-developed countries, such as the pesticide paraquat.

However, China offers substantial support for companies to invest in innovation in many specialty chemicals segments including electronic chemicals, engineering plastics, fluoroorganics, organosilicones, water treatment chemicals materials and several others.

As a consequence, my conclusion stated to the attendants was not to assume India´s chemicals producers will have a general competitive advantage over China. China is pursuing a long-term strategy of moving from labor intensive industries to an innovation-driven economy. Obviously this will favor some chemical segments while others will be affected negatively. However, as any glance into a list of the top 100 global chemical companies will show, it is not the countries with the weakest environmental regulation that have the strongest chemical industries. In fact, it seems more likely to me that rules which initially were seen as detrimental to a country´s chemical industry (e.g. REACH in Europe) eventually led to competitive advantages for the affected companies. So far the long-term trend has always been towards safer, less polluting chemicals – and it does not hurt to be the first to offer them.